It's in shellstyle.dll
Check this guide out by idas/ZEUSosX:
http://zeusosx.deviantart.com/art/elimi ... e-98110684You can hide it by changing the hex colors to that of your background in that area, or replace it with a BMP.
I don't know how to expand that folder button vertically (altering the values in the button section did nothing), so for now I have altered the arguement in that line to look for a BMP image, so you get a few pixels above the word "Folders" to make the text look vertically centered. The problem with that is having button states can conflict with the static ExpandoSizerline BMP.